Does investor identity matter in equity issues? Evidence from private placements

Krishnamurthy, Srinivasan; Spindt, Paul A.; Subramaniam, Venkat; Woidtke, Tracie

doi:10.1016/j.jfi.2004.01.001

Cited by 135 publications

(110 citation statements)

References 22 publications

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“…There is a significantly negative relation between discount and all four return measures. This result is in line with the empirical findings in Bajaj et al (2001), Krishnamurthy et al (2005), and Barclay et al (2007), and is consistent with the argument provided by Hertzel et al (2002) that private placement discount reflects overvaluation. In contrast to Chen et al (2010a) who document a significant negative relation between earnings management and long-run private placement return in the U.S. market, we fail to find any significant relation in our context.…”

Section: Baseline Regressionssupporting

confidence: 92%

Three Essays on Empirical Corporate Finance

Han¹

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This thesis comprises three essays on empirical corporate finance.The first essay provides a new explanation for investment-cash flow sensitivity from the perspective of CEO inside debt holdings. We examine the effect of CEO pensions and deferred compensation (inside debt) on investment-cash flow sensitivity for a sample of U.S. manufacturing firms from 2006 to 2012. We find that the firms with higher relative CEO leverage ratios (CEO's debt/equity ratio scaled by the firm's debt/equity ratio) generate higher investment-cash flow sensitivity. Moreover, one standard deviation increase in the logarithm of the relative CEO leverage ratio enlarges investmentcash flow sensitivity by 50%. This positive relationship still holds even after we take endogeneity and financial constraints into account.The second essay explores the net effect of a politically connected board on a firm. Using a quasinatural experiment in China -a regulatory change to forbid bureaucrats from sitting on the board of public firms -we address the causality by testing the market reaction. Those firms with politically connected directors who are targeted by the regulatory change show a significantly positive abnormal stock return on average. The result is robust for various model settings and for a matched sample using the propensity score methodology. Additionally, the announcement effect when a politically connected director resigns is significantly positive, and significantly higher than the effect when a non-connected director resigns. Overall, our results suggest that the agency cost effect of a politically connected director dominates the value effect.The third essay examines the effect of investor divergence of opinions on the long-run performance of private placements. We propose and construct a direct measure of investor divergence of opinion, based on auction bids data of the private placements in China. We find that firms with higher bids dispersion generate lower long-term stock returns after the issuance of private placements. This effect is economically significant and robust when controlling for market discount and for dispersion in analyst forecasts. Moreover, this negative relation is stronger for stocks with more stringent shortsale constraints. Our findings provide strong evidence in support of the Miller's (1977) divergence of opinion hypothesis.iii Declaration by AuthorThis thesis is composed of my original work, and contains no material previously published or written by another person except where due reference has been made in the text. I have clearly stated the contribution by others to jointly-authored works that I have included in my thesis.

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Section: Baseline Regressionssupporting

confidence: 92%

Three Essays on Empirical Corporate Finance

Han¹

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“…Krishnamurthy, Spindt, Subramaniam, and Woidtke (2005) document that the long-term underperformance is concentrated among companies that sell equity to unaffiliated investors. Barclay, Holderness, and Sheehan (2005) show that most of the investors remain passive and that companies obtaining funding from passive investors perform worse.…”

mentioning

confidence: 99%

Hedge Funds as Investors of Last Resort?

Brophy¹,

Ouimet²,

Sialm³

2006

Rev. Financ. Stud.

190

163

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Hedge funds have become important investors in public companies raising equity privately. Hedge funds tend to finance companies that have poor fundamentals and pronounced information asymmetries. To compensate for these shortcomings, hedge funds protect themselves by requiring substantial discounts, negotiating repricing rights, and entering into short positions of the underlying stocks. We find that companies that obtain financing from hedge funds significantly underperform companies that obtain financing from other investors during the following two years. We argue that hedge funds are investors of last resort and provide funding for companies that are otherwise constrained from raising equity capital. (JEL G14, G23, G32)Hedge funds have recently become an important source of funding for public companies raising equity privately. Financing young companies with severe information asymmetries is an important investment strategy for some hedge funds. Since 1995, hedge funds have participated in more than 50% of the private placements of equity securities and have contributed about one-quarter of the capital raised in such equity issuances, a total investment that has exceeded the contributions of other investor classes. This paper sheds light on the role of hedge funds in such private placements.In perfect financial markets it should be irrelevant whether a firm obtains funding from hedge funds or from other investors. To investigate whether the identity of the investors matters, we use a unique dataset that

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“…public investors). For example, Krishnamurthy et al (2005) find that although the shareholders not participating in the placement experience post-issue negative long-term abnormal returns, the participating investors purchase the shares at a discount and earn normal returns. Accordingly, we examine the previous evidence and explanation of the discount, and estimate the returns for both categories of investors in Canadian private placements.…”

Section: Discountsmentioning

confidence: 99%